The new European financial architecture

Silvia Vori – Banca d’Italia

May 2012

DO NOT QUOTE

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Outline

1. The reform of EU supervision: drivers,objectives,architecture

2. European Systemic Risk Board (ESRB); first experience

3. European Supervisory Authorities (ESAs)

4. EBA and the Colleges of Supervisors

5. EBA recapitalization package

6. The EU framework for crisis resolution

Conclusions

1. The reform of EU supervision: drivers, objectives, architecture

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The drivers of the reform

Many deficiencies of EU supervision highlighted by the crisis:

in the rules• Disconnect between cross-border activites and national jurisdiction• In many areas common rules declined in different ways• Room for regulatory arbitrage• Competition in laxity and national champions

in supervision• Absence of a macro-prudential oversight framework • Different supervisory evaluation models and methods • Inadequate home-host coordination within supervisory colleges• Difficulties in coordinating actions at time of crisis

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The objectives of the reform

The main answers given by the reform: • Establishment of a body in charge of macro-prudential oversight

• Strengthening of the micro-prudential supervisory framework:3 new EU Authorities with the following tasks:

- improve convergence of rules and practices (Single Rulebook)- strengthen cooperation in supervision of cross-border institutions - contribute to the financial system’s risk assessment (i.e. stress tests)- perform some supervisory functions at a centralized level (CRA)

• Work ongoing on a European framework for crisis management

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The main steps of the reform

February 2009• De Larosière Report (DLR): proposals for reforming EU supervision

March, May and June 2009• European Commission Communications: DLR implemented, action plan• ECOFIN and EU Councils confirm Commission’s proposals

September 2009• Commission’s legislative proposals for ESRB and ESAs

October and December 2009• ECOFIN – common position on ESRB and ESA regulations

September - October 2010• EU Parliament approves in plenary the set of rules, formally adopted by

the Council at its subsequent meeting January 2011

• All new structures operative

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The new EU financial architecture

ESRB

I

macroprudential supervision

EBA

II

ESMA

III

EIOPA

IV

JointCommittee

V

National Authorities

VI

individualinstitutions

microprudential supervision

E S F S

banks securitiesmarkets

Insurance,pension

funds

crosssector

2. European Systemic Risk Board (ESRB): first experience

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ESRB - mission, objectives, tasks

ESRB Regulation (No. 1092/2010 of 24 November 2010):

Mission: responsible for macro-prudential supervision of EU financial system

Objectives: prevention/mitigation of systemic risk

Tasks: • collects and analyzes all relevant information• identifies and prioritizes systemic risks • issues risk warnings and recommendations for corrective actions• monitors the follow-up to recommendations• solicit the Council to issue declaration of emergency situation• co-operates with ESAs on assessment of risk to financial stability

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Relations ESRB-ESAs

Collection and exchange of informations The ESRB may request aggregate or summary data to the ESAs, to the ESCB, to the Commission, to national authorities, and, upon reasoned request, data on individual institutions

Assessment of risks to financial stabilityIntegrating the macroprudential analysis conducted by the ESRB with bottom-up risk assessments from the ESAs (ex. Risk Dashboards)

Conduct of stress tests at the European levelCollaboration between ESRB and EBA (early experience: stress tests conducted in July 2011 by EBA in collaboration with ECB, ESRB,Com)

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ESRB organization

General Board: decision-making body; decides by simple majority of voting members; quorum of 2/3; exceptions to this rule in some cases (see below)

Steering Committee: support to the General Board; 14 member body prepares GB meetings, reviews documents, monitors progress in the ESRB work

Secretariat (provided by the ECB): provides analytical, statistical, administrative and logistical support

Advisory Technical Committee:replicates GB composizion; provides advice and assistance on technical matters relevant to the ESRB work, at the ESRB Chair’s request

Advisory Scientific Committee:advisory body composed of 15 representatives of academia and trade associations (industry, PMI, consumers)

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Decision making body: the General BoardChair: ECB Chair (to be reviewed after 5 yrs) 2 Vice-Presidents (1 elected)Members with voting rights: ECB Vice-President and 27 Governors of EU national central banks; A Commission representative; The Chairs of the 3 European Supervisory Authorities (ESAs); The Chair of the Advisory Technical Committee; The Chair and the 2 Vice-Presidents of the Advisory Scientific Committee

Members without voting rights: 1 representative per Member State of national supervisory authorities; The Chair of the Economic and Financial Committee.

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Risk warnings and recommendations

May be general or specific (never individual institutions)

May be addressed: to the EU as a whole, to the Commission (on legislative issues), to one or more Member States, to the ESAs, to one or more national supervisory authorities and, in this last case, also to the respective Member States

Shall be forwarded to the Council, the Commission and when addressed to a national supervisory authority also to the ESAs

2/3 majority required for adopting a recommendation and to make a risk warning or a recommendation public

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Follow-up to recommendations

Recommendations addressees are required to communicate to the ESRB, which shall inform the Council, the actions undertaken in response to the recommendations

The ESRB decides on a case-by-case basis when to disclose the risk warnings or recommendations and in such cases it informs the addressees and the Council in advance

Adequate justifications must be provided for inaction (“comply or explain”)

If follow-up is insufficient, the ESRB signals to the addressees, the Council and, where relevant, the responsible ESA

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The process of macro-prudential analysis

Financial Infrastructure

Systemic monitoring and analysis

Financial Sector & Institutions

Macro-economic environment

Policy recommendations

Financial Markets

Financial Infrastructure regulation and oversight

Micro-prudential instruments

System wide macro-prudential

instruments

Financial Market regulation & supervision

Monitoring of follow-up- Policy implementation

- Policy impact

Macroprudential Assessment

Decision to communicate

Risk Warning

Decision to issue recommendation

No

No

Yes

Yes

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Outline and main questions

What is systemic risk and where does it come from?

What approaches can be used to identify and to assess systemic risk?

How can financial instability be addressed?

Which instruments can be used to achieve macroprudential policy goals?

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Systemic risk

“Risk that financial instability becomes so widespread that it impairs the functioning of a financial system to the point where economic growth and welfare suffer materially” (ECB definition)

• “Horizontal or cross-sectoral dimension”: Failures of banks or severe malfunctioning of key markets

• “Vertical or time-series dimension”: Endogenous build-up and unravelling of imbalances

• “Size matters” (SIFIs)

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Approaches for risk identification and measurement

Financial stability indicators – measure current state of instability in the financial system

Early warning signal models – identify variables that can predict financial crises

Contagion and spillover models – network analyses that project what happens if one or more institutions fail

Macro stress-testing – assess the resilience of the financial system to extreme but plausable aggregate shocks

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How to address financial instability

Useful Policies:- Macroprudential policies (Countercyclical capital buffers)- Taxation (tax regime for capital or debt, bank levy)- Corporate governance (remuneration, dividend policies) - Microprudential supervision (solvency ratio, leverage)- Monetary policy (interest rates decisions) - Lending of last resort (for liquidity problems)- Fiscal support (interaction sovereign debt risk/bank risk)

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Objectives of macroprudential policy

Defining a framework for macroprudential policy

similarly to monetary policy framework, start with identifying intermediate policy objectives (related to market failures):

Strengthen resilience to excessive credit and leverage Address maturity mismatches/liquidity and funding risk Limit exposure concentration Address expectation of bail outs Strengthen resilience of infrastructures

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Instruments for macro-prudential policy objectives - 1

Link the instruments to each intermediate objective – define a possible taxonomy of macro-prudential instruments:

Mitigate/prevent excessive credit growth and leverage- instruments:- Countercyclical capital buffers- Instruments that directly affect the credit cycle • i.e. limits on Loan-to-Value (LTV) ratios or• increased risk-weights on certain sectoral exposures• Measures taken to face risks related to F/X currency loans

(higher risk-weights, higher provision rates,restrictions on F/X loans) Mitigate/prevent maturity mismatches – instruments:

- Weighted liquidity ratio (LCR)- Unweighted liquidity ratio (loan-to-deposit ratio)- Restriction on funding sources – NSFR

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Instruments for macro-prudential policy objectives - 2

Limit direct/indirect exposure concentrations- instruments:

- Large exposure restrictions

- CCP clearing requirements Limiting expectations of bail-outs – instruments:

- SIFI capital surcharge- Recovery and resolution plans/regime

Strengthening financial infrastructures – instruments:- Deposit insurance schemes- Margins/haircut requirements for CCP clearing

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Instruments - possible application in practice

Example: Overheated housing markets• Act on mortgage supply: raise capital charges on loans

with relatively high loan-to-value (LTV) ratios• Act on mortgage demand: reduce limits on LTV and loan-

to-income (LTI) ratios (in booms) to reflect greater risk in the underlying collateral

• Calibration issues (see Bank of England 2009, 2011)

- Transmission channels (state of the cycle, offsets)- Effectiveness (perfectly competitive market, demand side

measures may be more effective)- Efficiency of competing instruments

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Some challenges of macroprudential policy

Need a better understanding of the transmission channels of the different instruments

Choice of the most appropriate instrument likely to depend on country- specific factors (structure of the financial system)

Scope for overlaps among instruments,risk of overregulation Reflection on risks of unintended consequences Need for coordination in the implementation of instruments

(minimize cross-border spillovers/sectoral arbitrage) Frequent policy adjustments may cause uncertainty in the

financial system

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First experiences with the new M-P framework - 1

ESRB actions in 2011 in respect of the task of identifying and assessing systemic risks for the EU area (warnings, hearings):

Call for a fully credible EBA stress test on EU banks (April 2011) and ask Member States to provide adequate backstops

Call upon EU governments to promptly implement measures approved in July to restore financial credibility and address sovereign risk/banking risk feedback loop (September 2011)

Call upon EU authorities to ensure that EBA package for banks’ recapitalization would not exacerbate risk of economic recession (Dec. 2011)

Call upon EU governments not to postpone fiscal/structural reforms, upon banks to strengthen their resilience (Mar.2012)

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First experiences with the new M-P framework - 2

3 ESRB recommendations (published in EU Official Journal): To address risks of excessive F/X currency lending (Sept.

2011) – need better information and monitoring, increased capital charges, limits on related funding

To avoid future tensions in US dollar funding market (Dec. 2011) – need more information and increased monitoring of banks’ contingency plans on funding

To establish national macroprudential mandates (Dec. 2011) – set of guiding principles to aid the development of macroprudential authorities at national level (stress in particular leading role of central banks in m-p policy)

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Some critical aspects concerning the ESRB

Is the ESRB too bureaucratic? Will it be able to “bite”?

Macroprudential policy framework still in its infancy, needs to be further developed. Macroprudential policy seems effective in preventing systemic risk, less so in a fully blown crisis

What is the link between macroprudential oversight and macroeconomic surveillance (EIP)?

How will macro-microprudential policies interact? Risk of conflicts, both at national level and cross-border

More?

3. European Supervisory Authorities (ESAs)

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ESAs - Objectives

Three new ESAs (EBA, ESMA, EIOPA) are established with the following objectives:

Set up the single rule book for the EU financial market Promote and enhance quality and consistency of

supervision Reinforce oversight of cross-border groups Early warning of upcoming vulnerabilities Effective early intervention and bank resolution

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ESAs - Tasks

Develop binding technical standards, guidelines, recommendations

Promote common supervisory culture / supervisory practices

Perform peer group analyses and peer reviews

Co-ordinate national authorities’ response in emergency situations

Promote consistent operating modalities of supervisory colleges

Contribute to financial system risk assessment in cooperation with the ESRB (development of risk dashboards, stress tests)

Monitor innovative financial products and activities

Contribute to the development of procedures for crisis management and of the European network of deposit guarantee schemes

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Binding technical standards

The Authority shall draw up proposals for technical standards• Regulatory or implementing standards (do not imply policy

decisions) in specific areas identified by the European legislation

The proposals are adopted by the Commission with Regulation or Decision (directly applicable without need for transposition)

The proposals are preceded by:• Public consultation• Impact Analysis• Opinion of the Banking Stakeholders Group

The Commission – when required by the EU's interest - may• Reject the standards proposed by the Authority• Make changes or partially approve the standards

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Breach of European law

In case of non-compliance by national authorities with EU financial legislation and rules, the ESA may:

• Inquiry into the suspected violation• Recommend to put an end to the violation (within 2 months)• Request action plan of the national authority (within 10 workdays)• If infringement not ceased within one month, the ESA may ask the

Commission to issue a formal opinion• The national authority shall inform within 10 workdays the

Commission and the ESA of action to implement the opinion

If the national authority does not comply and integrity and competitiveness of the system is at stake, the Authority can take decisions towards individual financial institutions

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Action in emergency situations

The ESA shall facilitate and coordinate the action of national authorities in emergency situations

Determination of the emergency situation:• Decision taken by the Council, at the request of one of the ESAs, the

Commission or the ESRB and in agreement with the ESRB, the Commission, the ESAs. The Council periodically reviews the decision

The Authority may take decisions binding national authorities to take the necessary steps to overcome the emergency

If national authorities do not comply with these decisions, the ESA may adopt measures towards individual financial institutions

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Binding mediation

The ESA may intervene in disputes between national authorities on cross border issues in the cases established by the European legislation

If the ESA conciliation fails, the ESA can take a decision which has binding effects on the parties of the dispute

If national authorities do not comply with the ESA decision, the ESA can take action towards individual institutions

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Safeguard clause

The ESA decisions concerning• emergency situations and• binding mediation

should not have direct consequences for the "fiscal responsibility“ of the Member States

The Member State may appeal the decision of the ESA The appeal suspends the decision of the ESA The Council decides whether to confirm or revoke the

decision of the ESA

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Systemic institutions and crisis management

Systemic institutions• The ESA are responsible for developing, in collaboration with the

ESRB, a common set of qualitative and quantitative indicators for the identification and measurement of systemic risk

• The ESA will also develop methodologies to identify systemic institutions that should be subject to a more intense supervision and when appropriate to proper procedures for recovery and resolution

Crisis management The ESA contribute to the development of resolution tools,

including funding mechanisms, deposit guarantee schemes and contributions from the private sector (financial levies)

In these areas the ESA may develop technical standards

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Information collection

The ESA collect the information needed for their tasks Information is provided by the national authorities

• To avoid overburden national authorities, the ESA take into account data already collected by the European Statistical System (ESS) and the ESCB

If data are not available from national authorities:• the ESA may make a reasoned request to other national

authorities, NCBs and national statistical offices and • as a last resort, to financial institutions

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Decision-making body – Board of Supervisors

Composition• The heads of national supervisory

authorities (with voting rights) Without voting rights:• The Chairperson• a Commission representative • an ECB representative• an ESRB representative• one representative for each other

ESA

Tasks• Takes decisions • Approves the work program, the

annual report, the budget and the financial statement

Decision-making rules• Simple majority-vote (as a rule)• Qualified majority with the weights

set by the Treaty for the adoption of binding technical standards

• Binding mediation: the Panel's proposal is approved by a simple majority unless it is rejected by a block minority

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Joint Committee of European Supervisory Authorities -

Permanent Forum of cooperation between the ESAs on cross-sector issues, including the application of the Directive on Financial Conglomerates

Composed of:• Chairpersons of the ESAs, who alternate as Chair (rotating annually) • Chairman of the Sub-Committee on Conglomerates• The Executive Directors of the ESAs, a representative of the

Commission and a representative of the ESRB attend the meetings

On cross-sector issues (including binding mediation) the ESAs shall reach a common position through the Joint Committee and adopt the acts of respective competence in parallel

4. EBA and the Colleges of Supervisors

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Colleges of supervisors in European legislation

• EU Law requires the establishment of colleges of supervisors for cross-border groups with at least one significant branch or two subsidiaries in another Member State

• There are more than 100 cross-border groups established in an EEA country; of these, 44 have consolidated assets of more than € 30 billion at end-2009 and at least two subsidiaries and / or significant branches in another Member State

• The average number of host supervisors per college is 10 (in larger colleges more than 20, in smaller ones 2)

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Colleges of supervisors – the role of EBA

The EBA contributes to promote the proper functioning of colleges and consistent application of rules among colleges

The EBA can:• Participate in the activities of colleges, including inspections• Collect and manage information in a centralized way• Co-ordinate stress tests at the EU level and make recommendations

to national authorities in order to face problems emerged • Promote efficient risk assessment activities within colleges (in

ongoing supervision and in stress situations)• Ask that decisions taken in the colleges be reviewed if they breach

either European standards or conflict with the objective of supervisory convergence

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Home-host coordination in the colleges of supervisors

EU law requires the home supervisor to reach a joint decision with host supervisors on the adequacy of capital at group (consolidated) and local entity level (individual)

A consolidated risk assessment report is produced by the home supervisor, taking into account host supervisors’ views

The decision on capital adequacy shall be taken within 4 months from the production of the report and shall be communicated to the group

The decision must be updated annually

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Role of the EBA

In case of disagreement between home and host authorities, decisions are taken separately by the home supervisor for the parent bank (consolidated level) and by the host supervisors for individual subsidiaries (individual/solo level)

Binding mediation by the EBA:

- during the 4 months’ period, any of the competent authorities can refer the matter to the EBA

- the authorities shall conform with the EBA decision

5. EBA recapitalization package

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Background

The deepening of the sovereign debt crisis since last summer has triggered a negative feedback loop:

- bank funding has been severely affected, with markets coming to a standstill

- this has triggered a significant deleveraging process, which is posing a serious threat to growth prospects

- the fiscal position of the sovereigns under stress risks deteriorating further

Last September, the ESRB called to strengthen bank capital:- transparent and consistent valuation of banks’ sovereign

exposures- recourse to backstop facilities

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Main passages

Since August, the EBA has put forward to the European Council technical proposals for addressing market concerns. Package presented in October:

- EU-wide guarantee scheme- a requirement to banks to establish a temporary and

exceptional capital buffer Capital measures agreed by the Council: banks are required to

strengthen their capital positions:- by building up an exceptional and temporary capital

buffer against market value of sovereign debt exposures at end-September (stock and prices)

- by establishing an exceptional and temporary buffer such that the Core Tier 1 capital ratio (= Core Tier 1 capital/RWA) reaches a level of 9% by June 2012

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Main purpose

Buffers are designed to provide a reassurance to markets about the banks‘ ability to withstand a range of shocks and still maintain adequate capital:

- The sovereign capital buffer is a one-off measure

- the EBA will reassess the continued need and size of capital buffers against banks’ sovereign exposures in the light of possible improvements of sovereign risk

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Sample banks

71 banks - Same sample as in EBA July 2011 stress test with minor exemptions (stress test sample: 90 banks representing more than 65% of EU banking assets and more than half of the banking assets in each country)

In Italy 5 banks:• Intesa-SanPaolo• Unicredit Group• Monte Paschi Siena• Banche Popolari • Unione di Banche Italiane

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Capital plan

Banks asked to submit plans for achieving the target capital levels to national supervisors by January 2011

Banks should first use private sources of funding– retained earnings and reduced bonus payments– new issuances of common equity and suitably strong

contingent capital (EBA term-sheet)– other liability management measures (i.e. buy-back

of existing hybrid instruments not recognised as CT1)

When necessary, government support measures (equity, hybrids) subject to EU COM approval

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Anti-deleveraging measures

Planned reduction in lending activity will not be allowed for reaching the 9% CT1 ratio benchmark

Reduction in the mix/stock of sovereign assets will not change the sovereign capital buffer that is a fixed amount (at end-September)

Reductions may be recognised for the achievement of the 9% CT1 ratio target if sales are a transfer of contracts or business units to a third party and do not lead to reduced lending to the economy

Capital plans must be shared and consulted on with the EBA and with competent authorities within colleges of supervisors to ensure that the need to maintain exposure levels of banking groups in all Member States is taken into account

If necessary the EBA will use its mediation role to that effect

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Overall shortfall and shortfall by country

The overall shortfall is EUR 114.7 bln; excluding €30bln attributed to Greek banks and €7bln to other banks under major restructuring, remaining shortfall figure is €78bln

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Capital shortfall, breakdown by bank, €bln

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Italian banks’ capital shortfall

Unicredit Group: € 7.9 bln Intesa-SanPaolo: --- Monte dei Paschi: € 3.3 bln Banco Popolare: € 2.7 bln UBI Banca: € 1.4 bln

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Contribution to the increased capital needs

The capital requirement is based on 3 drivers which on average contribute in equal proportions to the capital shortfall:

1. the target CT1 ratio of 9%2. the application of Basel 2.5 (i.e. CRD3) rules for RWAs3. the sovereign buffer

– about 60% of the sovereign buffer relates to assets held in the AFS portfolio which, under the current accounting standards, are already marked-to-market and will be marked to market for regulatory purposes under Basel 3

– the remaining component can be attributed to the marking-to-market of EEA sovereigns in the HTM and L&R portfolios

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Contribution to the strengthened capital requirement

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The relevance of the 3 drivers vary across countries

Banks from distressed sovereigns more affected by the sovereign buffer:

• about 70 percent Belgium and Cyprus• 50 percent for Portugal and Italy

Spanish banks are the most affected by the 9 percent CT1 threshold

German, French and Dutch banks are the most affected by the Basel 2.5/CRD3 rules

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Buffer after capital plans

In banks’ capital plans, methods to cover shortfall are divided into:

(A) Direct Capital Measures (€74bn, equal to 96% of shortfall)

(B) Capital Impact of RWA Measures (€23bn, 30% of shortfall) Planned measures give a Recapitalization Amount of €97bn,

about €20bn above the shortfall of €78bn

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Capital impact of RWA measures

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RWA Impact of deleveraging

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Planned reduction in lending

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Deleveraging so far: US vs EU

Deleverage faster and more aggressive in the US as of the onset of the crisis: aggregate bank balance sheet down 16% from 2007 peak

Deleverage metrics(source: Haver Analytics, Barclays Capital, McKinsey Global Institute)

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EU bank deleverage from equity increase not asset decrease

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Italian banks capital plans submitted in January

UCG completed in January a capital increase of €7.3bln and other capital measures fully satisfying the EBA requirement

MPS, Banco Popolare and UBI plans envisage a range of actions: - asset disposals- capital management operations- retained earnings- validation of internal risk models- transactions involving hybrid instruments already in place

BoI asked banks to adopt dividend/remuneration policies consistent with EBA targets

Overall bank plans do not imply significant cutback in lending

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Issues

• Deleveraging is driven by cost and availability of funding

• This is more a Eurosystem’s task: exceptional measures taken by ECB, including 3yrs LTROs (on 21 Dec 2011 and 29 Feb 2012) and the expansion of the list of assets eligible as collateral in refinancing operations

• The EBA and national supervisors can control that the implementation of the EBA recommendation does not lead to deleveraging

6. The EU framework for crisis resolution

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Need for a European crisis resolution framework

In the recent crisis national support measures and deposit guarantee schemes were used to a different degree: these measures avoided a systemic collapse but resulted in high costs for governments and competitive distortions

Cross-border groups were broken down and rescued separately along national borders regardless of their integrated business model

Objectives of a European framework for crisis resolution:- Preserving financial stability- Minimizing taxpayers’ burden- Protecting depositors

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Main work on crisis resolution in EU

The revision of Deposit Guarantee Schemes Directive EU Commission Consultation on a European framework for

cross-border crisis resolution in the banking sector: • Consultations in October 2010 and January 2011 • Legislative proposals expected in the Summer 2012

Communication from the Commission on the fund for the crisis resolution in the banking sector - May 2010

EU Commission discussion paper on the debt write-down tool – bail-in – March 2012

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Elements of the EU framework for crisis resolution

Main elements of the resolution framework: Instruments for preventive intervention

- Remedial measures (art. 53 Italian Banking Law) Instruments for crisis management and resolution

- Reorganization and resolution measures (in Italy: special administration and compulsory liquidation)

Mechanisms to coordinate intervention measures Financing crisis resolution

- Remedial measures (art. 53 Italian Banking Law)

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Instruments for preventive intervention

Objective: early intervention to prevent worsening of the bank’s difficulties

Means: extending powers of supervisory authorities Minimum common toolkit

- Measures that need / require the bank’s management to act- Measures towards the bank’s management - Measures towards the shareholders

Conditions for activation: soft triggers vs hard triggers- Co-ordination, legal certainty but also room for discretion - Flexible “early warnings” system

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Instruments for resolution

Objective: minimize systemic impact and related costs by identifing alternative options to bail-out or liquidation

Instruments: full harmonization or minimum common set - Bail-in (contractual/statutory)- Acquisition of assets and liabilities by private subjects- Transfer of assets and liabilities to bridge bank - bad bank/good bank

Conditions for activation: - before insolvency - balance between legal certainty for shareholders' rights and

promptness for intervention - guarantees for creditors and counterparties

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Mechanisms for coordination

Cross-border groups resolution – COM proposal

1. Co-ordination of measures by home authority - takes into account the need for an integrated solution to crises

2. Framework for capital and liquidity intra-group transfers- based on a voluntary agreement between all entities in the group,

approved by all involved authorities

3. Authorities’ power to prohibit such transfers is constrained- Linked to conditions for activating resolution measures- EBA may play a mediation role

4. Necessary condition for the functioning of this framework is the introduction of the concept of “group interest” in legislation

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Financing the resolution

Private sector contribution (shareholders and creditors): debt/equity conversion (contingent capital) and haircuts on unguaranteed creditors (bail-in). Controversial issue

Resolution fund financed by intermediaries’ contributions • Purpose: not rescue, but part of the new resolution system• Harmonized network of national funds • Ex ante contributions• Basis for calculating contributions: assets, liabilities, profits? • Separate funds or part of public budget?

Burden sharing • not specific formulas ex-ante, but preparation activities in Cross

Border Stability Groups enabling such allocation when necessary

Conclusions

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Broader overview

The ESFS is a component of the new European economic governance, comprising also:

Surveillance of macro-economic imbalances (EIP) Fiscal framework (fiscal compact) Coordination of economic policies (European semester,

pact euro plus for competitiveness) Financial assistance (EFSF/ESM) EU framework for crisis resolution

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Conclusions – open issues

EFSF subject to review by EU COM in 2013 – some open issues:

Interaction between microprudential supervision and macroprudential oversight: possible conflicts?

Impact of sovereign debt crisis on EU financial integration: signs of balkanization of the EU financial markets threatening the conduct of the single monetary policy

Should we move towards a more federal approach to financial supervision? A Banking Union (for LCBGs), as a complement to Monetary Union and a further step towards fiscal union?

Eurozone vs EU integration?

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Thank you!

Silvia VoriBanca d’ItaliaHead of Financial Stability DivisionFinancial Stability UnitTel. 06 4792 4224e-mail silvia.vori@bancaditalia.it